A salary sacrifice scheme can affect tax credit entitlement. Parents are strongly advised to find out to what extent any tax credits they receive will be affected before they commit themselves to receiving childcare vouchers through a salary sacrifice scheme.
Many people may be better off claiming support fully through the tax credit system and not accepting childcare vouchers offered. It is therefore very important to understand fully the implications before making a decision.
The amount of Working Tax Credit WTC a family receives is dependent on several factors, including the number of hours worked, the level of earnings received, how many children are in the family and the amount of eligible childcare costs.
WTC is calculated on gross household income (either for the current tax year or the previous tax year depending on your circumstances), so if household income is reduced through a salary sacrifice scheme this may lead to an increase in an individual’s WTC entitlement.
However, if an individual has childcare costs that are eligible for the childcare element of the WTC and chooses to receive childcare vouchers through a salary sacrifice scheme, their eligible childcare costs for tax credit purposes will be reduced by the amount received in vouchers. HMRC will probably need to be notified of this reduction within a month.
For example, if childcare costs are £100 a week and the parents receive £55 a week in vouchers, they can only claim £45 a week as their average weekly childcare cost for tax credits. This can lead to a decrease in WTC entitlement.
It is also important to note that including childcare costs (or increasing and decreasing them) in a calculation can have an impact on the amount of Child Tax Credit received where income is too high to actually receive any WTC. For this reason, it is important to check your situation before taking childcare vouchers.
Due to the complicated interaction between the two systems, parents will often be better off receiving support for their childcare costs through WTC rather than through childcare vouchers. You may also want to consider the Tax-Free Childcare scheme (although you can’t get Tax-Free Childcare at the same time as claiming Universal Credit, Working Tax Credit, Child Tax Credit or childcare vouchers).
The government proposes to close childcare voucher schemes to new claimants in April 2018.
Although not a comprehensive list, the following people are most likely to benefit from taking childcare vouchers:
- people who pay a significant amount of income tax at 40%, both before and after accepting vouchers;
- people whose average childcare costs exceed £175 a week for one child or £300 for two or more children (the maximum rate of the childcare element is 70 per cent of actual childcare costs of up to £175 per week for one child or £300 per week for two or more children);
- couples whose joint income is too high to benefit from the childcare element of Working Tax Credit;
- people who are not entitled to claim WTC, for example, because their hours worked are too low or because they are subject to immigration control; and
- people whose employer is only prepared to give an increase in pay by means of childcare vouchers with no cash alternative.
However, these are not absolute rules and are still subject to some exceptions depending on individual circumstances. The only way to be certain is to perform a complex calculation.
There's more information on tax credits on the GOV.UK website, including a 'better off' calculator that factors in the intera ction between childcare vouchers and tax credits to help you decide the best option for you.